5 terrible tax surprises

If your divorce attorney was really, really good, those hefty post-marriage payments could produce a larger-than-expected tax bill when you file your return. Since the IRS doesn't have a mechanism for collecting taxes from alimony checks as you get them, you'll have to pay all taxes due on the income in a lump sum by April 15.

You can avoid this unwelcome tax surprise by making quarterly estimated tax payments mentioned earlier on your alimony income. Alimony payments made by an ex-spouse also have tax considerations, but in that instance the payer can deduct them. Regardless of whether you're receiving or paying alimony, you'll need to focus on maintaining your credit and managing your finances after the divorce decree is issued.

Forgiven debt

Forgive but collect is the IRS motto when it comes to canceled debt.

Did you lose control of your credit cards to the point that you simply were unable to pay the balance? What a relief it was when you discovered you could negotiate with your credit card company to get it to accept just half of what you owed. This amount is known as forgiven, or canceled, debt.

Getting your credit card bill cut from eight grand to $4,000 certainly helped your personal bottom line. But it also could be a boon to the U.S. Treasury. Why? The tax law generally considers the amount you get Visa, MasterCard or any creditor to write off as earned, and therefore taxable, income to you. Expect the accommodating debt-holder to send you a Form 1099 detailing your discharge of indebtedness as miscellaneous income.

You say you didn't get the official tax statement? Don't breathe too easy. It's quite possible that your unexpected cancellation of debt income was reported to the IRS even though the company accountant didn't fill out your form.

Not every debt settlement, however, has to pad Uncle Sam's pocket. Under the Mortgage Debt Relief Act that became law in late 2007, for example, some homeowners who are granted forgiveness of mortgage debt won't have to pay taxes on that amount.


There are some restrictions. The forgiven debt amount is limited to up to $2 million or $1 million for a married person filing a separate return. The tax relief only applies to mortgage debt discharged by a lender in 2007, 2008 or 2009. And the must have been taken out to buy or build a primary residence, not a second or vacation home.

And to help you avoid getting into a situation where you have to throw yourself on the mercy of those you owe, Bankrate has an extensive collection of debt management articles.

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